Tags: el-erian | pimco | serious | slowdown

El-Erian: World in ‘Serious, Synchronized Slowdown’

Thursday, 02 August 2012 04:27 PM

Pacific Investment Management Co.’s Mohamed El-Erian called recent declines in purchasing manager indexes in Europe and Asia “frightening” and said the world economy is suffering its severest slowdown since the global recession ended in 2009.

El-Erian, who is chief executive officer of the Newport Beach, California-based Pimco, predicted global growth of 2.25 percent over the next 12 months. That’s down from the 3.9 percent in 2011 and 5.3 percent in 2010 recorded by the International Monetary Fund. The world economy contracted 0.6 percent in 2009.

“This is a serious, synchronized slowdown,” El-Erian said in an interview Thursday.

His forecast highlights the troubles the global economy is facing as the euro area struggles to contain its debt crisis and growth in the U.S. and China slows. Separate surveys of purchasing managers released Wednesday showed manufacturing in the 17-nation euro area shrinking by the most in 37 months while Chinese factories teetered on the edge of contraction.

The global slowdown is weighing on the U.S. at a time when its economy is already struggling, El-Erian said. He sees U.S. growth of 1.5 percent over the next 12 months, dangerously close to what may be considered “stall speed,” and puts the odds of an American recession at roughly 25 to 33 percent.

“While a recession is not my baseline forecast, it certainly is a serious risk,” said El-Erian, whose firm manages the world’s largest bond fund.

U.S. Economy

The U.S. economy slowed last quarter as consumers curbed their spending while state and local governments cut back. Gross domestic product expanded at a 1.5 percent annual rate in the second quarter, down from 2 percent in the first, according to Commerce Department data.

El-Erian said he expects the euro area’s economy to contract by 1.5 percent over the coming year. It grew 1.5 percent in 2011, according to the Washington-based IMF.

European Central Bank President Mario Draghi said at a press conference in Frankfurt Thursday that the region’s economy looks to have stayed weak in the second quarter and into the third after being essentially flat in the first three months of the year.

He told reporters that the central bank may wade forcefully into bond markets in tandem with Europe’s rescue fund, stepping up its efforts to fight the area’s financial crisis.

The euro declined and Spanish bond yields rose on disappointment that Draghi didn’t signal imminent ECB action.

El-Erian said that Draghi had good reasons to postpone action. The ECB chief wants to pressure governments into taking more steps on their own to resolve the crisis and may want to conserve the central bank’s limited resources.

Draghi, though, risks allowing the crisis to worsen by not acting now, El-Erian suggested.

“When they act in a month’s time, they will be less effective than if they acted today,” he said.

He put the odds of the currency zone breaking apart over the next six months at 35 percent.

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Thursday, 02 August 2012 04:27 PM
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